Why Republicans will likely hold their noses and vote for Hillary in the 2016 presidential election.

By John Kimelman

On the presidential campaign trail, Hillary Clinton has called out Wall Street for wrecking Main Street during the financial crisis. And her desire to jack up taxes on short-term capital gains isn’t exactly good news for the investor class. Yet Clinton, the strong favorite to win the Democratic nomination, seems better suited to help the markets than the Republican front-runner, Donald Trump. With a Trump-Clinton race looking more likely after last week’s Super Tuesday voting, Barron’s has sized up each candidate’s positions on taxes, spending, trade, and other issues that directly affect markets. Our conclusion: Clinton is the more investor-friendly of the two.

Photo: Daniel Acker/Bloomberg

Her recent rhetoric aside, Clinton’s moderate political instincts and left-center policy goals suggest a president who wouldn’t stand in the way of the financial markets. A fan of compromise and a knowledgeable Washington player, she might even be able to strike a bargain with House Speaker Paul Ryan and Senate leaders on tax reform. Just look at the company she keeps. Many Wall Streeters, including Roger Altman, executive chairman of Evercore; Marc Lasry, chairman of Avenue Capital Group; and George Soros, chairman of Soros Fund Management, are supporting her candidacy and contributing to her campaign and political action committees. “Hillary would be fairly predictable, and markets like predictability,” says Greg Valliere, the chief strategist of Horizon Investments and a well-known handicapper of the political scene. “She is a bit more moderate than Obama, and despite all the concerns that she would repeat the Obama agenda, she would be more willing to compromise,” particularly on efforts to lower tax barriers that prevent U.S. corporations from repatriating profits made abroad. Make no mistake. We are not endorsing Hillary Clinton for president of the United States. Nor are we saying that she would be the best president for investors from among the current crop of candidates. We are simply weighing the impact of a President Clinton on the financial markets, based on her stated positions and past actions, against those of her most likely rival, Donald Trump.

Photo: Drew Angerer/Bloomberg

Though some of Trump’s tax-cutting initiatives could potentially help both the economy and markets, those tax cuts coupled with his adamant refusal to address ballooning entitlement costs, such as Medicare and Social Security, would expand the national debt to the breaking point. On top of that, his call for heavy tariffs against China could cause a trade war that would devastate the world economy. In a cover story last fall (“Trump Is Wrong on China,” Nov. 14), we noted that Trump’s tariff plans were reminiscent of the protectionist policies of the 1920s and early 1930s that plunged us into the Great Depression. Clinton, by contrast, hasn’t offered any ideas that are overly risky for the economy or markets, though her aggressive stance of driving down prescription-drug costs has Big Pharma investors concerned. Like Trump, Clinton has yet to offer a realistic plan to cut spending on entitlements, which make up about two-thirds of federal spending.Valliere, who advises his firm’s institutional-investor clients, adds that he knows a number of professional investors who are considering “holding their nose and voting for Hillary, because the devil you know is better than the one you don’t know.” Even David Kotok, a top money manager who doesn’t plan to vote for Clinton, thinks she can please the markets. “As far as being market-friendly, Hillary is a formidable contender,” says the chairman of $2.4 billion Cumberland Advisors. “There is a substantial constituency in the markets that could find her a very acceptable president.” Kotok is a Republican and plans to vote for John Kasich in the coming Florida primary. Many Americans have trouble voting for Clinton because they are troubled by her reputation for accepting campaign contributions and personal favors from special-interest groups, including the financial-services industry. Six-figure speaking fees, not to mention large contributions to the Clinton Foundation, certainly call her objectivity into question. Then there’s her poor judgement when, as secretary of state and the nation’s top diplomat, she used a private computer server to conduct government e-mail communication.That has led to a FBI investigation into whether national security was compromised. If Clinton is indicted on charges arising from her e-mail practices, it could destroy her candidacy. It’s difficult to gauge the odds of this happening. ANY APPRAISAL OF TRUMP must factor in his brash personal style, which is a turnoff to many. Though he gave a restrained speech after his Super Tuesday victories, Trump’s penchant for put-downs, which was much on display at the Republican debate on Thursday night, reveals a personality type that many view as unsuited to the presidency. His initial failure to strongly repudiate the support of former Ku Klux Klan Grand Wizard David Duke has raised questions about his political character. Then there’s a nagging concern that Trump, a career real estate developer and reality-television star, hasn’t properly schooled himself in the myriad issues a president will face.

Trump’s refusal to release his recent tax returns to the general public raises the question of what he has to hide. Normally, the failure of a candidate to release his tax returns would be a big deal, says Valliere, “but I think he’ll get away with it because he gets away with everything.” Clinton has posted the past eight years of her returns on her Website. In recent days, a number of leading Republicans have voiced fears of a Trump presidency, including 2012 Republican nominee Mitt Romney, who in a scathing speech called Trump “a phony” and “a fraud” who “has neither the temperament nor the judgment to be president.” Indeed, the Republican Party appears to be ginning up a Stop Trump movement, which could throw the nomination open to a vote in a brokered convention come July.“Trump is not presidential,” says a leading hedge fund manager who requested that his name not be used. “He is appealing to people’s worst instincts. And I can’t stand Hillary Clinton. She is pandering to the 99%. She is not a person of integrity.” All of that may be true, but the likelihood of a Clinton-Trump matchup in November is growing. A CNN poll of Democrats nationwide conducted on Feb. 24-27 has Clinton leading Sanders 55% to 38%, and a CNN poll of Republicans has Trump with 49%, Marco Rubio at 16%, and Ted Cruz at 15%. If the polling data over the past month is any indicator, Clinton and Trump have both gained steam in recent weeks as they piled up primary victories. SHOULD CLINTON WIN the presidency, investors can expect a president whose tax, spending, and trade proposals will be easily processed by markets, assuming they make it through Congress.Clinton plans to encourage long-term investment by raising the short-term capital-gains rate on couples making more than $465,000 per year. She also wants to effectively raise the marginal income-tax rate to 43.6%, from 39.6%, on taxable income of more than $5 million, according to the Tax Foundation.Her tax-raising agenda focuses on the wealthy and leaves most other Americans untouched. Republicans in Congress will probably oppose such a hike, but some Wall Streeters have spoken favorably of her plans. By contrast, Trump’s more ambitious and business-friendly agenda cuts the corporate tax rate to 15% from the current 35% and consolidates the seven current tax brackets into four, with a top marginal rate of 25%, according to the Tax Foundation.He would also create a special repatriation tax of 10% on the foreign profits of U.S. companies to encourage them to invest those funds in the U.S., as part of the effort to spur capital investing and hiring in the U.S. Cumberland Advisors’ Kotok believes that Trump’s ideas for lowering taxes and bringing U.S. corporate earnings abroad back to the U.S. are appealing and could help spur some economic growth. “I would characterize it as a modernist version of the supply-side argument,” he adds. But there are questions about whether this plan would create added problems for the economy while creating new jobs. A study of Trump’s polices by the Tax Foundation concluded that while they would cut taxes by close to $12 trillion over the next decade, the costs would also expand the federal debt by more than $10 trillion, a dangerous development.And there are no guarantees that most of these repatriated profits will be put to good use.Indeed, past efforts to offer tax breaks or holidays to encourage repatriation haven’t always resulted in companies hiring millions of new workers in the U.S. or building new plants. A study by the nonpartisan National Bureau of Economic Research of the last U.S. tax holiday, in 2004, found that “repatriations did not lead to an increase in domestic investment, employment, or R&D, even for the firms that lobbied for the tax holiday stating these intentions.”Then there’s the political feasibility of it all. “Our concern with Trump’s 15% corporate tax rate…is not in the policy merits, but in the politics,” wrote David Bahnsen, the chief investment officer of the Bahnsen Group, a wealth management firm, on Forbes.com. “Because Trump has offered no specifics about how to pay for it, and because we think he would face a very challenging relationship with Congress, we cannot be excited for this tax reform because we do not believe it will happen in its present form.” For all of Trump’s bold talk, much of his plan to “make America great again” could prove to be fiscally impractical. And his aggressive tariff threats could cause turmoil with our trading partners, whether or not those plans see the light of day. The more temperate Clinton is promising less when it comes to revitalizing the U.S. economy and bringing competitors like China to heel. But sometimes less is more.

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